By Andrew Nelson
Analysts from JP Morgan recently attended an analyst forum; the draw card was a presentation by Vivek Tulpule, Rio Tinto's ((RIO)) Head of Economics and Markets. What JPM found out is that Rio is fairly optimistic about the outlook, especially given the view that China will grow 8% this year.
The economic fragility in the OECD, especially Europe, and new supply additions could well weigh on near term commodity prices. Longer term is quite different, with Tulpule pointing out that capital preservation and cost escalation has effectively discouraged new supply. This has already started to limit production additions, which is supportive on a three to five year view.
As far as iron ore goes, Rio sees far less of a chance of a sharp drop in prices this coming September. First, most aren't looking to build or hold stock, while construction is lifting from a low base and China. Given the current direction, the broker thinks China is far less likely to throw a spanner in the works like it did last year.
The company continues to expect the aluminium market to be soft near term because of a reluctance to shut down or idle production given the high re-start costs. Rio is positive on copper longer term given a lack of new supply. Declining production from established operations and delays on new projects given current capex tightness are pointing to future supply tightness.
In terms of coal, Rio is more upbeat than BHP Billiton ((BHP)), seeing long term structural coking coal deficits, while high production costs for thermal coal in China should also offer support for prices. Unconventional gas in China does provide somewhat of a threat, but Rio points out a huge amount of gas would be needed to displace enough coal to have an impact.
BA-Merrill Lynch has focused on some of the commentary out of the other big Aussie, BHP Billiton ((BHP)), also noting upbeat commentary on the general outlook, again with the usual warnings about a hard to predict China.
A little bit at odds with the positive commentary from Rio and BHP is the fact that share price performance from the metals and mining sector been mixed, at best, so far this year.